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Informist, Tuesday, Feb. 11, 2025

By Vidhushi RajPurohit

MUMBAI – Prices of government bonds ended higher Tuesday driven by the Reserve Bank of India's decision to double the notified amount for gilts purchases for its open market operations auction on Thursday, dealers said. The rupee's rise against the dollar and expectations of further liquidity easing measures by the RBI also boosted bond prices. Gilt prices erased some gains towards the end of the session owing to a rise in US Treasury yields.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.63, or 6.70% yield, against INR 100.53, or 6.71% yield, Monday. After rising 21 paise to the day's high from its previous close, the gains in the 10-year benchmark were capped by profit booking, likely by state-owned banks, dealers said. On Monday, state-owned banks were the top net buyers, purchasing gilts worth INR 35.73 billion, when the yield on the 2034 gilt had risen to almost 6.73%.

At the OMO auction Thursday, RBI will buy five bonds – the 7.17%, 2030 gilt, the 7.18%, 2033 gilt, the 7.10%, 2034 gilt, the 7.54%, 2036 gilt, and the 7.18%, 2037 gilt. The central bank Monday doubled the notified amount of its gilts purchases to INR 400 billion from INR 200 billion. Dealers see the revision of the OMO size as a move by the RBI to offset the impact of its dollar sales in the foreign exchange market in recent days, particularly on Monday.

"Looking at the RBI's prompt action to manage the liquidity, and then the way it is trying aggresively to protect rupee levels, we are hoping for it come up with more liquidity measures and that is what picked up the market today (Tuesday) as well," a dealer at a primary dealership said.

Tuesday, the rupee settled at 86.8275 a dollar. The Indian currency logged a rise of 65 paise from its previous close, the most in a day since Nov. 11, 2022, primarily due to the RBI's intervention, dealers said.

Since Monday, the RBI has likely sold nearly $15 billion worth of dollars in the spot market to support the rupee, which had hit a record low of 87.9500 a dollar Monday. This would amount to a net outflow of around INR 1.30 trillion of rupee liquidity from the banking system. Monday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--was INR 1.96 trillion. Latest RBI data released Tuesday showed durable liquidity on Jan. 24 was in a deficit of INR 341.03 billion.

An intraday rise in US yields likely led to some foreign outflows, erasing the gains in gilt prices towards market close, dealers said. Foreign portfolio investors sold gilts worth INR 20.46 billion through the fully accessible route Tuesday, according to data from Clearing Corp. of India at 1745 IST. The yield on the 10-year benchmark US note rose to 4.53% at 1550 IST from 4.50% at the close of Indian market hours Monday. 

After the Monetary Policy Committee meeting Friday, traders were expecting the yield curve to steepen with the yields on short-term bonds falling faster than ones on long-term papers. However, the positive of a 25 basis points repo rate cut did not reflect on the prices of papers maturing within 10 years. The tight liquidity was the primary reason cited by traders for the underperformance of short-tenure gilts. 

Tuesday, both the liquid five year papers - the 6.75%, 2029 bond and the 7.04%, 2029 bond – ended slightly lower. The pushback of tighter liquidity coverage ratio norms by a year to March 2026 by the RBI has also reduced the demand for short-term gilts, dealers said.

"Right now the belly of the curve, the 10 to 15 years, is performing well. The RBI has also included (mostly) these papers in its OMO announcment, so that has led to replacement demand," a dealer at a state-owned bank said. "For short-tenure papers to perform better, a clarity on further rate cuts would be needed."

Traders expect India's CPI inflation data for January, due 1600 IST Wednesday, to provide cues on the roadmap for further rate cuts. CPI inflation is seen easing to 4.5% in January, according to an Informist poll. Meanwhile, dealers anticipate the RBI will continue with its prompt measures to ease systemic liquidity. They expect the central bank will increase the quantum of its OMO auction next week as well. 

OUTLOOK

Wednesday, gilt prices are likely to take cues from the overnight movement of US Treasury yields at open, dealers said. Gilt prices may also take cues from the movement in the rupee against the dollar. Traders will likely remain cautious ahead of the release of the India's CPI print for January.

Traders will also be cautious before the release of the US CPI inflation data for January and US Federal Reserve Board Chair Jerome Powell's submission of the Monetary Policy Report to US Senate Banking Committee this week. Market participants will closely assess any tariff-related statements by US President Donald Trump and their potential impact on global trade. Crude oil prices could also be a trigger if they move significantly, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.75% for the day.

India Gilts: Remain up; 10-15 yr gilt demand up on expectations of more OMOs

MUMBAI--1559 IST--Prices of government bonds remained higher after the Reserve Bank of India doubled the size of its notified amount for gilt purchase through an open market operation auction scheduled for Thursday, dealers said. Traders flocked to bonds with maturities of 10-15 years on hope of the RBI increasing the size of its OMO auction on Feb. 20, along with expectations of more such buys.

At the auction held last month, the RBI offered to buy bonds that were largely in the 10-15 year tenure range--some were erstwhile 10-year benchmarks--and announced a similar offering for this week's auction. Dealers expect the RBI to continue this trend, and preferred these papers even though most of them were illiquid. Foreign inflows and likely purchases by mutual funds aided the rise in prices of these bonds, dealers said. 

"PSU banks are deep in the money in these papers, which is most probably why RBI is choosing them to buy at the auction...if no one had good stock of the offered papers, the OMO would flop," a dealer at a state-owned bank said. Banks sold bonds at the previous OMO auction from their 'held-to-maturity' books, and are likely to do so at subsequent auctions as well.

Moreover, the RBI's likely intervention in the foreign exchange market to defend the rupee drove up expectations of more OMO auctions, dealers said. Some dealers expect the RBI to increase the quantum of its OMO auction next week as well. The RBI is anticipated to have sold around $15 billion since Monday in the spot market, as per dealers in the foreign exchange market.
 

Short-term bonds have not moved sharply despite the RBI Monetary Policy Committee's repo rate cut by 25 basis points to 6.25% last week. Banks were buying the bonds when prices dipped as they were still expected to perform the best when liquidity normalised from the deficit seen since mid-December, dealers said. The less than rosy outlook on liquidity in the March quarter has kept investors on the sidelines, despite the RBI's liquidity injections. The pushback of tighter liquidity coverage ratio norms by a year to March 2026 by the RBI has also reduced the demand for short-term gilts, dealers said.

The market turnover was at INR 332.15 billion, compared with INR 300.55 billion at 1530 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.73%. (Cassandra Carvalho)

India Gilts: Remain up; liquidity still seen tight after RBI's OMO buys

MUMBAI--1315 IST--Government bond prices remained up as the Reserve Bank of India revised upward the size of notified amount for gilt purchase through open market operation auction scheduled for Thursday, dealers said. Traders said the announcement was positive for bond prices, but would not improve systemic or durable liquidity much due to the central bank's persistent dollar sales.

According to rupee dealers, the RBI has likely sold nearly $15 billion worth of dollars in the spot market over the last two days to rescue the rupee, which had hit a record low of 87.9500 a dollar on Monday. This would amount to a net outflow of around INR 1.30 trillion of rupee liquidity from the banking system. Even with the RBI's increased OMO size, the central bank is only seen offsetting the liquidity impact of its foreign exchange operations, rather than ensuring frictional liquidity available to banks is in surplus, dealers said.

Bonds maturing in five years underperformed the 10-year gilt on this view, with the bulk of the scheduled purchases at Thursday's auction to be in bonds maturing in 10-13 years. Some profit booking likely kept the gains limited after the benchmark 6.79%, 2034 bond rose 21 paise to the day's high, dealers said. Buying momentum was also capped as some dealers were also placing short bets on the 6.79%, 2034 gilt to pick it up at higher yield at the INR-390-billion gilt auction on Friday.

"Market is of course positive but also has a good opportunity for those who picked up gilt (6.79%, 2034) earlier around 6.71% level to make some profit. The benchmark 10-year gilt is a paper that traders generally have a good holding of for trading purpose," a dealer at a state-owned bank said.

The government will sell INR 220 billion of the 6.79%, 2034 bond at the auction. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 1305 IST showed trades with a notional value of INR 128.16 billion in the 6.79%, 2034 gilt, rising nearly INR 30 billion since Friday.

Meanwhile, some traders also expect the RBI to announce another tranche of OMO auction after the last one was scheduled on Feb. 20 as systemic liquidity remains in deficit and the central bank continues its aggresive support of the Indian currency. Should the RBI's operations continue at the same pace, dealers also see next week's OMO auction size being increased. On Monday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--was at INR 1.96 trillion and the durable liquidity as on Jan. 24 also remained in a deficit of INR 341.03 billion, RBI data showed.

The market turnover was at INR 244.65 billion, compared with INR 213.35 billion at 1330 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.73%. (Vidhushi RajPurohit)

India Gilts: Rise as Thu OMO auction size doubles, rupee surges

MUMBAI--1011 IST--Government bond prices were sharply up after the Reserve Bank of India doubled the size of its open market operation auction for the purchase of government securities on Thursday to INR 400 billion, dealers said. The rise in rupee near opening also aided gilt prices. 

"With this(increase in OMO auction size), there is some confidence boost in the market and the overall (RBI) buying could be around INR 1.5 trillion (in FY25) through both auctions and screen-based buying similar to what the market was expecting before MPC, and it could easily happen if RBI choses to increase auction sizes or comes up with another tranche," a dealer at a private bank said. "Whenever there is a strain in liquidity due to RBI's intervention on the FX (foreign currency), it will come up with some liquidity boost...the belly of the curve will perform better because because of replacement demand."

At Thursday's OMO auction, the RBI said it will buy five bonds – the 7.17%, 2030 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.54%, 2036 gilt and the 7.18%, 2037 gilt. Prices of these bonds are expected to rise during the day as traders will look to sell it at the auction on Thursday at higher prices, dealers said. Traders are also picking up bonds maturing in seven to 15 years to replace the bonds to be sold at Thursday's auction, they said. Most of the sales are likely to be through the held-to-maturity bucket of banks's investment portfolios.

The rupee rose 84 paise to 86.6400 a dollar, its largest intraday rise in over two years, due to likely intervention by the central bank and traders hitting stop-losses on their long dollar bets. Traders expect foreign portfolio investors to pick up gilts with the rise in rupee, dealers said.  

The market turnover was at INR 178.60, compared with INR 76.75 billion at 1030 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.73%.  (Srijita Bose)

India Gilts: Seen up as RBI doubles Thu's OMO auction size

MUMBAI – Government bond prices are seen opening higher after the Reserve Bank of India doubled the size of its open market operation auction for the purchase of government securities on Thursday to INR 400 billion, dealers said. With the increase in the upcoming auction size, the RBI is expected to remain proactive in infusing durable liquidity into the banking system even after the disppointment at the Friday's outcome of the RBI's Monetary Policy Committee meeting. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.67-6.73%, compared to 6.71% on Monday. The yield on the bond is seen opening 2 basis points lower after the increase in the OMO auction size, dealers said.

However, the 10-year government bond may continue to underperform against other bonds of similar maturity as it is not part of this week's OMO auction. The yield on the bond has risen the most among comparable tenures, and also in comparison to both short- and long-term benchmarks as traders sold the gilt due to their disappointment about an OMO auction calendar, which some expected the RBI would announce at the MPC outcome on Friday. Traders have also placed short bets on the bond ahead of its INR 220 billion supply on Friday, as part of the weekly gilt auction, dealers said.

At Thursday's OMO auction, the RBI said it will buy five bonds – the 7.17%, 2030 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.54%, 2036 gilt and the 7.18%, 2037 gilt. Prices of these bonds are expected to rise during the day as traders will look to sell it at the auction on Thursday at higher prices, dealers said.

The RBI is expected to continue infusing durable liquidity into the banking system, particularly through open market operation purchases, both at auction and in the secondary market, dealers said. The RBI's screen-based purchases totalled INR 388.15 billion in January, and it bought INR 200.20 billion worth of gilts at its first OMO purchase auction in over three years.

Meanwhile, US Tresury yields were little changed from the close of 4.50% at 1700 IST on Monday after US President Donald Trump on Monday signed proclamations to raise the tariff on aluminum imports to 25%. Gilt prices may take cues from the movement in the rupee against the dollar during the day, dealers said. With a strong dollar index, pressure on rupee during the could limit the rise in gilt prices, they said.  (Srijita Bose)

End

US$1 = INR 86.8275

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Saji George Titus

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